abrdn: Significant chance of ECB interest rate increase

abrdn: Significant chance of ECB interest rate increase

September 11, 2023

ECB
Stock exchange euromunten.jpg

Felix Feather, Quantitative Economic Analyst at abrdn, looks ahead to the ECB meeting later this week:

'At the last monetary policy meeting of the ECB’s Governing Council, policy makers agreed that they should pursue a policy of strict data-dependence. However, it was apparent in the minutes of that meeting that the dispersion of views across the board was growing.

Since then, various officials have endorsed a hike. The Bank’s doves have been less vocal, but there are certainly policy makers concerned about the apparent realisation of downside risks to the economy. So, agreement across the Governing Council is unlikely to be achieved. Whether the doves or the hawks win the day rests on their respective effectiveness in winning the votes needed to secure their preferred rate decision.

Two factors favour the ‘hold’ faction. Firstly, several usually hawkish officials will lack voting rights next week under the Bank’s rotating voting system. Secondly, the Bank’s only feasible compromise decision – a hold paired with hawkish messaging – avoids an immediate hike. We therefore think a hold is the most likely outcome.

However, there is still a significant chance of a hike. Such a move risks exacerbating a recession that we think is already underway. A broad suite of indicators suggest the Eurozone economy is likely to suffer a contraction in Q3. With the impact of past monetary tightening still building, and no relief forthcoming, we expect that downturn to deepen over the winter.'

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